Controlled group, QSLOB plans and forfeitures

[DMcGovern]

Controlled group has two companies ("A" and "B"), each with a 401(k) plan.  The plans are currently operating as QSLOBs.  As a result of a purchase agreement, the QSLOB status will cease to exist and they plan on terminating the B plan and merging the accounts into the A plan.  

Would the exclusive benefit rule apply to the forfeitures in the B plan?  If so, does it only apply to forfeitures that occurred immediately prior to the termination of the B plan?

[Tom Veal]

Before ERISA, forfeitures could be allocated only to employees of the specific employer that maintained the plan in which they arose.  ERISA established the principle that all members of a controlled group are treated as a single employer for almost all purposes, including the exclusive benefit rule.  Rev. Rul. 84-50 confirmed that the pre-ERISA ruling on the point (Rev. Rul. 69-570) is obsolete.

[Paul I]

There are some nuances when QSLOBs are involved.  The separation rules are strict about any commingling of the plans.

For starters, a QSLOB election remains in place until the plans file with the IRS that the QSLOB is being rescinded.  The purchase agreement itself likely cannot rescind the QSLOB. 

There can be complications particularly if the purchase transaction creates short plan years.  To keep things clean and not inadvertently triggering a violation of the QSLOB rules, consider having the effective date of the purchase agreement coincide with the first day of a new plan year for each plan.  As part of the acquisition process, consider having each plan clean up all existing forfeitures in each plan by using them to pay expenses or allocating them within each respective QSLOB.  This avoids any question about whether participants in one QSLOB benefited from assets in the other QSLOB.

Is this overly conservative?  Probably, but the consequences of blowing the QSLOB and fixing resulting coverage failures should make it worth the effort.

[DMcGovern]

Many thanks to Tom and Paul for the responses!